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An overview of the Chapter 7 process

Knowing the basics of Chapter 7 can ease your fears about seeking the debt relief that you need.

Although we are reminded almost daily that the economy is growing, many people continue to struggle with joblessness or underemployment brought on by the 2008 recession. In 2013 alone, over 26,000 people and businesses in Pennsylvania sought bankruptcy protection. If you are struggling with unmanageable bills, you may have heard that Chapter 7 bankruptcy can help relieve you of most of your debt. However, you may have also heard that you will have to sell your property during the process, which makes you hesitant to seek its protection. Knowing the basics about Chapter 7 process can help ease your mind about getting the help that you need.

How Chapter 7 works

It is correct that during Chapter 7, your nonexempt unencumbered property may be sold by the bankruptcy trustee to pay your debts. However, you may be surprised to learn that you probably own very little nonexempt property. Important assets such as your house, car, pensions and benefits, and other personal items are exempt from being sold by federal or Pennsylvania law. As a result, in the majority of cases, most Chapter 7 filers do not face a sale of a significant number of their assets.

After the sale of any nonexempt property, the court grants you a discharge of most of your unsecured debt, such as your credit cards, medical bills and personal loans, in as little as 90 days after filing. Upon receiving the discharge, you are free of this debt forever and have no obligation to repay it. In addition, the discharge prevents creditors from attempting to collect the debt once your bankruptcy has been completed.

Chapter 7 does not wipe out your secured debt, such as your mortgage or car loan. As a result, your creditor has the right to foreclose on your house (or repossess your vehicle) if you do not keep this debt current throughout your bankruptcy. However, since you will be relieved of your unsecured debt, there will be more of your income to devote to paying this debt. Because of this, many people find that filing Chapter 7 allows them to keep their houses and cars.

Qualifying for Chapter 7

Unlike Chapter 13, you do not need a certain level of income to file Chapter 7. However, due to bankruptcy reform measures passed by Congress in the last decade, all Chapter 7 filers must pass a means test. During this test, the court will examine your income. If you make less than the median income in your state, you automatically qualify for Chapter 7. If you make above the median income, the court will determine your disposable income by calculating how much is left over after you pay for your necessary bills (e.g. rent, mortgage and living expenses), If there is a sufficient amount of disposable income, you must file Chapter 13 instead.

The purpose of this test is to ensure that those that can pay back some of their debts do so. However, the overwhelming majority of those considering Chapter 7 do not have large amounts of disposable income, so passing the test is generally not a problem.

An attorney can help

Chapter 7, although a powerful tool against unmanageable debt, is not always the best solution for everyone. Because of this, it is advisable to consult with an experienced bankruptcy attorney before taking any action. An attorney can explain your options to you and recommend one that would best fit your individual circumstances.

Keywords: bankruptcy, Chapter 7

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